Don't Forget Economic Growth

With very few exceptions, the ongoing debate among macro-economists falls squarely within the spectrum of ideological differences. Each side is concerned primarily with isolating facts that would support the main contention. For instance, the big argument is whether president Obama’s stimulus package will be useful or whether it will merely deepen the crisis. To my mind, the argument between monetarists and Keynesians will probably not be resolved irrespective of the outcomes of the stimulus packages that the US, European, Japanese and the Chinese governments adopt. Just like many people, many macroeconomists have invested life’s work in supporting either side of that divide hence are unlikely to abandon that in spite of the outcomes.

However, the point that has been conspicuously absent is how any nation and the US in particular would maintain the growth that it needs irrespective of that outcome. Darron Acemoglu seems to be in the minority who are engaged in this. In this extremely balanced and perceptive piece, he reminds me that the purpose of economic policy should be about promoting growth. This growth imperative is not only undeniable but introduces an issue on which the contending parties cannot easily brush aside. He states a chastening idea that the imperative of growth implies that attempts to sacrifice growth in dealing with the crisis is a poor trade off.

Stressing that the three main mechanisms for maintaining growth are technological advancement, reallocation of resources and institutional quality, the piece suggests to me that winning the ideological argument between the Keynesians and the neo-classical economists without growth would be a pyrrhic victory.

The standing developments of New Growth theory by Paul Romer argues that long term economic growth is primarily and directed by innovation and technology. Innovation is not only tied to the development of physical technologies as the internet and machines but even financial products that are now so despised. He states that, “Even the financial innovations, which are somewhat in disrepute in the recent crisis, are in most cases socially valuable and have contributed to growth”.

The implications of the reallocation mechanism as a driver alludes to the Schumpeterian idea of creative destruction and the US government should be cautious about protecting all firms by all means. It is clear that a number of firms will be built upon the ashes of the firms that are presently unable to provide value. In essence, the automobile manufacturers of the US are probably not worth trying to save by all means. Reallocation of that labour, skill and capital away from the big three Detroit firms is an imperative for growth and for renewal that may be politically difficult but is essential for the US. I am in agreement here.

Institutional foundations to support a markets economy are also argued for. These include property rights, a level playing field and regulations to support free markets. The most encouraging comment is the need to free market economics and capitalism from the rhetoric that it is bereft of regulation. In the midst of the ideological fight, it is right to see a competent economist driven by the desire not to lose the quest for growth.